Business investment is driving stronger-than-expected increases in GDP
The race to dominate the field of artificial intelligence is giving a big boost to the U.S. economy.
Insatiable demand for computer memory and other technologies needed to build artificial intelligence boomed again in the second quarter, and could spur another above-average increase in economic growth.
New orders for computers and related products jumped 3.1% in June, the government said Monday in its monthly report on durable goods.
Over the past year, orders for the AI-related hardware have surged 17%, a level last sustained during the dot-com era more than a quarter of a century ago.
"The bottom line is that business investment outlays remain robust, powered in large part by the AI buildout," said Stephen Stanley, chief U.S. economist at Santander Capital Markets.
AI spending shows no signs of letting up, either.
Hyperscalers such as Amazon (AMZN), Google $(GOOG)$ and Microsoft $(MSFT)$ that operate the networks and data centers powering AI are spending trillions of dollars to establish dominance. Many businesses are also investing to expand their own in-house capabilities.
Business investment is one of the two main pillars of U.S. economic growth - consumer spending is the other. Corporate investment in equipment largely tied to AI contributed 0.8 percentage points to the 2.1% increase in gross domestic product in the first quarter.
That's four times the average contribution per quarter since 2000.
A repeat of high equipment spending is likely in the second quarter. GDP, the official scorecard of the U.S. economy, is expected to expand at a 2.1% annual rate for the second quarter in a row.
The second-quarter GDP report "should show a healthy contribution from business equipment spending, and, no less important, the June durable goods data flag a positive handoff to the third quarter," said Oren Klachkin, financial-market economist at Nationwide.
For a long time, Wall Street economists and the Federal Reserve believed the top sustainable growth rate of the U.S. economy was around 1.8%.
Now the so-called optimal growth rate could be notably higher, according to economists, with AI investment and rising productivity playing key roles.
The big question is whether soaring AI investment will eventually meet the same fate as the dot-com era, when the bubble burst and many companies failed.
Record investment from 1994 to 1999 eventually gave way to a sharp decline in computer-related spending from 2001 to 2005.
It could take years before there's an answer, given that the AI build-out is still in its early days.
For now, the AI boom is helping to expand the U.S. economy. So far, there's little evidence it's killing lots of jobs, something some leading technologists had warned.
The one big downside?
The frenzy of AI investment is boosting inflation for a range of goods - such as consumer electronics - that also require memory and powerful chips. Apple $(AAPL)$ recently raised prices on iPads and other devices.
Demand for key construction materials to build data centers has also risen.
If high inflation persists, the Fed could be forced to raise interest rates. Such an outcome could increase the cost of borrowing for AI and potentially reduce the investment that's been supporting the economy.
"For the Fed, this becomes a double-edged sword," said Priscilla Thiagamoorthy, senior economist at BMO Capital Markets.
-Jeffry Bartash
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(END) Dow Jones Newswires
July 27, 2026 11:22 ET (15:22 GMT)
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